Independent Directors and the Japanese Experience (Part 1)

We were alerted by GovenanceMetrics on recent information about Japanese corporate governance practices, particularly the Inter-Corporate Network Dealings and Minority Shareholder Protection — Cases in Japan, published by the Asia-Pacific Office of CFA Institute/CFA Society of Japan.  Japan's system of corporate governance is in transition but, as recent data indicates, it has a long way to go.

Through most of the post-war period, Japan relied for corporate governance primarily on the main bank system (for a bit of history on the securities markets in the post war period, see Of Brokers, Banks and the Case for Regulatory Intervention in the Russian Securities Markets).  Boards consisted mostly of former employees, with the position largely ceremonial.  Real control was exercised by main banks, both because of ownership control (indirectly through the keiretsu) and because it was a critical if not the critical source of financing.  The system was also used by the government, particularly the doyens in the Ministry of Finance, to guide industrial policy.  This is discussed at greater length in  J. Robert Brown, Jr., Industrial Policy and the Dangers of Emulating Japan, 27 GW J. Int'l L. & Econ. 1 (1993). 

Government influence has wained and so has the main bank system.  In the aftermath of the bubble economy of the 1980s, Japanese banks have begun to unwind their holdings in corporate clients.  Moreover, large companies are no longer dependent upon main banks for their financing, at least for those companies capable of tapping bond markets and international markets.  As a result, corporate governance in Japan has been in transition. 

Consistent with the global trend, Japan has increasingly turned to independent directors as the solution.  In 2009, the TSE adopted Rule 436-2 which required listed companies to have at least one independent director.  The definition of independent mostly screened for material financial and employment relationships with the company (or its affiliates), not for relationships with management or controlling shareholders.  See Guidelines, at III.5(3)-2.  Independent directors were charged with acting in the best interests of shareholders. 

How has the approach worked?  We address that in the next post.